AngioDynamics, Inc. — Form 10-Q Summary
Reporting period: Three months ended August 31, 2013, the first quarter of fiscal 2014. Financial statements are unaudited; comparisons are with the three months ended August 31, 2012 unless stated otherwise. Dollar amounts below are in millions, converted from the filing’s thousands, except per-share data.
Business context
AngioDynamics develops, manufactures and sells medical devices for vascular access, peripheral vascular disease, oncology and surgery. It reports as one operating segment. Approximately 18% of quarterly sales were international, versus 19% in the prior-year quarter.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net sales | $83.6 | $83.4 |
| Gross profit / margin | $42.5 / 50.8% | $39.5 / 47.3% |
| Operating income / margin | $1.3 / 1.5% | $0.7 / 0.8% |
| Net loss / diluted loss per share | $(0.4) / $(0.01) | $(0.7) / $(0.02) |
| Operating cash flow | $7.3 | $(5.6) |
| Investing cash flow | $(6.8) | $2.3 |
| Financing cash flow | $(0.3) | $(1.3) |
- Sales were nearly flat. Peripheral Vascular sales rose 5% to $45.5 million; Vascular Access fell to $25.3 million, primarily on lower PICC sales; Oncology/Surgery declined 1% to $11.2 million. U.S. sales increased 2% to $67.1 million, while international sales decreased 5% to $14.8 million.
- Gross margin improved primarily because the prior-year quarter included acquired inventory step-up costs. Sales and marketing expense rose 8% to $20.0 million, mainly to expand the U.S. sales force. The current quarter also included $1.0 million of medical device excise tax and $0.7 million of expense from remeasuring contingent consideration.
- Cash and marketable securities totaled $23.9 million at August 31, 2013, compared with $24.0 million at May 31, 2013. Cash and cash equivalents alone were $22.1 million. Inventories increased to $59.2 million from $55.1 million.
- Debt was $142.5 million at August 31, 2013: $13.1 million current and $129.4 million long-term. The revolving facility under the then-existing credit agreement was undrawn at quarter-end. The company reported compliance with its debt covenants.
Material changes and developments
- On August 15, 2013, the company acquired Clinical Devices B.V., its Netherlands distributor of fluid-management products, for estimated total consideration of $8.7 million, including $5.0 million fair value of contingent consideration. The acquisition added approximately $4.3 million of goodwill and $5.1 million of intangible assets.
- On September 19, 2013, after quarter-end, the company refinanced its debt with a $100 million senior secured term loan and a $100 million senior secured revolver. It borrowed $100 million under the term facility and approximately $41.4 million under the revolver to repay the prior credit agreement. The new facilities have five-year maturities.
- Quarter-end fair value of contingent acquisition consideration was $79.8 million; the company estimated undiscounted future payments of approximately $94.3 million, dependent on future sales and milestones.
Outlook, risks and unusual items
- The filing provides no numerical revenue or earnings guidance. Management expects continued significant R&D investment, while noting that business downturns could lead to reduced spending. It identifies margin improvement as important to profitability and cites product mix, new technologies and pricing pressure as factors that could constrain margins.
- Following FDA approval in June 2013 to study NanoKnife for focal prostate cancer, the company was pursuing institutional review board submissions and anticipated patient enrollment in fiscal Q2, ending November 30, 2013.
- Regulatory risk remains significant: the company disclosed an FDA Warning Letter and multiple Form 483 observations concerning quality systems at facilities. It warned that unresolved matters could lead to further regulatory or legal action, including product restrictions, recalls, fines or facility restrictions.
- Other disclosed risks include the stayed C.R. Bard patent litigation, contingent acquisition payments, reliance on successful product development and market acceptance, competition, pricing pressure, integration of acquisitions, and possible impairment of goodwill or intangible assets. The company reported that the Cardinal Health arbitration was dismissed with prejudice in September 2013.
- The company held $1.85 million in auction-rate securities with failed auctions; the issuers were current on interest payments, but near-term liquidity was not assured. Management said available cash, operating cash flow and the new $100 million revolver were expected to cover anticipated capital needs for at least 12 months.
Key facts for investors to verify
- Whether near-flat sales and improved gross margin persist after excluding the prior-year inventory step-up comparison benefit.
- Sales trends in PICCs, international markets, AngioVac, EVLT, microwave products and NanoKnife, and whether the expanded sales force drives growth.
- Cash conversion and working-capital needs, particularly the increase in inventory, alongside capital spending and acquisition-related cash demands.
- Post-refinancing debt, covenant headroom, borrowing costs and the impact of the approximately $41.4 million revolver draw.
- Future contingent consideration payments and the assumptions underlying their $79.8 million fair value and $94.3 million estimated undiscounted amount.
- Progress on FDA remediation and the NanoKnife clinical trial, as well as outcomes and potential exposure in remaining litigation.